Friday, February 13, 2015

But the Eurozone is not a complete union. It is a collection of sovereign states that have chosen to use a currency that none of them uniquely issues. Monetary policy is common across the Eurozone, but fiscal policy is the responsibility of the individual states. And therein lies the problem.

In a complete union such as the United States, a single monetary authority is partnered by a single federal-level fiscal authority. Automatic stabilisers (pensions, important welfare benefits, income taxes) are set by the federal authority and apply to all states in the union equally, just as monetary policy does. Other functions such as education may also be administered at federal level to ensure that all citizens have equal opportunity. Individual states or cities may raise their own funds to administer local programmes, and if they act irresponsibly they can and do go bankrupt, as Detroit in the US has done recently. In a complete union, the broad base of taxation and benefits is not affected by city or state bankruptcies. People in Detroit didn’t lose their pensions because the city had run out of money. But in the Eurozone, if a state runs out of money it may be unable to pay its pensioners (...)

The Eurozone is slowly being forced towards fiscal union, because monetary union without fiscal union does not work. The current fiscal compact is clearly not fit for purpose: if there is one thing that the Greek rebellion could usefully achieve, it would be to force its redesign. The Greek finance minister says that his aim in forcing the Greek problem into the open is to deepen Eurozone integration. It remains to be seen if he will succeed, or whether Greece will be forced to leave the union, temporarily or permanently.